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Value of ongoing advice

How much does it cost to put a child through private schooling for a typical London day school?

I reran the figures recently, and found that my estimates were out of date. The sum is in the region of 200,000. This does not include university education. It is not cheap, which is why many places are supported through financial help.

The costs of fees and living in London were brought home to me by a couple that I saw recently. Stephen and Marjorie are what might be termed an average middle-class couple. Stephen is a partner in a firm of architects and Marjorie works part-time as an administrator for an engineering company. Stephen is a higher-rate taxpayer, earning a good basic income, with reasonable profit-share. Marjorie is a basic-rate taxpayer.

They came to me because they had let their financial planning slip. They felt they were not making the most of their opportunities and had not done as much as they should have to plan for retirement. They felt constrained in terms of availability of cash immediately for future security but wanted to get things in order so they knew what they should be doing.

I recall one of my colleagues saying to me that the three major financial commitments that one has in life are buying a house, saving adequately for retirement and providing for a child’s education.

He said it was possible to do two but to do all three was difficult. I was reminded of this as I looked at this couple. They had three children and they had put them through private education. The youngest is still in the last years and the two older ones have virtually completed.

They had made a decision four years ago to gear up on property and had taken out a mortgage which they were paying. The fact that the mortgage was interest-only put strains on future resources as there was no repayment vehicle.

My initial reaction was “Oh heavens, what on Earth am I going to do?” However, when I started to look at their situation, I could see that they were being realistic in terms of retirement timescales. They are in their early to mid-50s and were not planning to retire earlier than 65. This gave me time to work with.

We could use the benefits that they had already built up in pensions towards the overall planning. From the information they had given me, the state pensions and the final-salary pensions, albeit small in isolation, contributed to half the income that they wanted at retirement. At least we had a foundation.

The pension planning they had outside these final-salary schemes was woefully inadequate. Stephen had about 50,000 in his pension, and Marjorie had no personal pensions. In terms of other assets such as investment portfolios, the amounts were small.

How was I going to wave a magic wand? Particularly as Stephen’s profit-share this year was fully earmarked to finalise the purchase of a partnership share in his firm. This meant we had to look at profits from 2007 and the problem with profits is they are unpredictable.

Given that their basic salaries are still tied up in servicing their mortgage and finalising the education of their three children, the only resources spare had to come from Stephen’s profits.

When I looked at this in depth, I realised that Stephen needs to maintain the same profit-share level. Half needs to be earmarked for retirement planning and the other half to repay the mortgage.

With this in place, plus the return of his partnership capital, I could see that the whole thing was going to fall in place.

What on initial viewing looked to be a hopeless case, turned into a workable solution, albeit one that carries a higher degree of risk than most cases.

The most important message that I had to get across to Stephen and Marjorie was that they need to take their finances seriously and that regular reviews were imperative. Slippage of even one year would put their retirement plans awry.

This is the value of ongoing advice. Much better this discipline and to achieve the retirement they want, than to keep drifting as they were.

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22nd February 201911:47 am

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